Tuesday 5 October 2010 11.25 EDT
First published on Tuesday 5 October 2010 11.25 EDT

In the last part of Adam Smith's Wealth of Nations which looked, in modern parlance at tax and spending, the father of economics warned in 1776 that if sources of revenue could not be found, for example by taxing Ireland or the colonies, the country should "endeavour to accommodate her future views and designs to the real mediocrity of her circumstances".

Unless the coalition government is attempting to resurrect colonialism it faces abandoning policies previously considered untouchable. The "mediocrity" of Britain's balance sheet lies behind chancellor George Osborne's moves to means test child benefit and cap handouts.

The savings are not huge – both measures taken together see the taxpayer better off by just £2bn – and at first glance could be dismissed as "salami-slicing" tactics. But what they represent are deep strategic shifts.

The pegging of welfare levels to wages represents a victory for the politics of envy. This is an expression of the resentment felt by workers towards "shirkers" – who it is felt can access extraordinary handouts.

From 2013 taxpayers will not reach into their pockets to fund a lifestyle that an average person could not buy through work. Benefit claims will be capped at about £500 a week or £26,000 a year.

This was foreshadowed by the Cabinet Office's State of the Nation report, released earlier this year, which estimated that 50,000 households in Britain are entitled to this level of benefit.

These were families facing "high rents, caring for large numbers of children, and/or living with severe disabilities". They were, said the report, in receipt of benefits at "rates high relative to working peers".

Excluding disability payments means this change will affect a very small pool of people. The same idea has influenced housing benefit policy.

Emblematic of Osborne's ambition is the second plank of welfare reform outlined in his speech at the Conservative party conference this week: stopping universal child benefit. The coalition has ended the state's historic acknowledgement that raising children imposes a cost that should be recognised irrespective of wealth.

In two years time there will be no child benefit for those in the 40% tax bracket earning over £43,875 a year. Higher-earning couples with three children will be worse off by £2,449 a year while some families with one child will suffer a £1,000 fall in income.

This is a genuine political divide. Labour, whatever its Blairite leanings, has traditionally supported universal benefits. Many on the left argue that unless the middle class benefits from the welfare state, it will refuse to pay the taxes to subsidise welfare for the poor.

Already, prominent social policy thinkers, such as Barnardo's chief executive Martin Narey, are raising the prospect of other universal benefits, such as winter fuel allowances and bus passes, being cut. Others ask why wealthy pensioners should receive a generous basic state pension.

The question remains whether the entire £2bn saving will be used to pay down debt or will be "refocused" to the poorest members of society. At present there is no sign the money will be redistributed – a move that allows the coalition to be cast as an uncaring slash-and-burn administration. Abandoning your principles to save money is excusable but the long-term electoral costs may be heavy.